A New Way for Product Makers to Overcome Patent Roadblocks

As products become more complex with increasing numbers of patented components, product makers face a growing challenge in licensing each of these components from their individual owners. These negotiations are usually a time-consuming adversarial process that imposes large transaction costs on the parties, not to mention nasty side effects like high-cost patent litigation and attempts by some unscrupulous rights holders to seek exorbitant fees.

The economist Carl Shapiro likened traditional patent licensing to assembling a pyramid. “To scale the pyramid and place a new block on the top, a [manufacturer] must gain the permission of each person who previously placed a block in the pyramid,” he said.

But now there’s a bright spot on the patent licensing front. The innovative licensing structure known as a patent pool is attracting renewed interest from tech industry leaders and winning praise from product makers and patent owners alike, including even some of the patent system’s harshest critics.

“Google has been very clear about the need to prevent abuses in the patent system,” says Allen Lo, the company’s deputy general counsel for patents and one of the industry’s most influential figures on patent issues. “But we believe that patent pools offer an additional market-based approach to solving the costly and litigious licensing challenges companies face in bringing today’s complex products to market.”

“Manufacturers wishing to license their own patent rights in a patent pool have greatly-reduced licensing and administration costs, and gain greater leverage as part of a pool.

Adds Comcast general counsel George Medlock: “Pools serve as a ‘one-stop shop’ for companies to license their IP rights, and also help companies avoid multiple costly litigation battles. It basically lowers transaction costs and litigation costs for the licensor and licensee.”

What’s a patent pool? Typically, patent pools bundle together related patents covering the building-block components of complex products—for example, the data compression protocols for transmitting high-density digital audio content that make up the Advanced Audio Coding (AAC) patent pool administered by San Francisco-based Via Licensing Corp. Via is a licensing organization spun out from Dolby Laboratories. It licenses its own cutting-edge audio patent rights, as well as those of AT&T, the Fraunhofer Institute, Philips, Microsoft, NEC, NTT DOCOMO, Orange SA, Panasonic and Ericsson. Manufacturers—including, as Lo indicates, Google—then buy a single license to all the patents in the pool.

The pool’s advantages for product makers (i.e., the buyers) are significant: one-stop shopping for all the patents needed—these are curated by the pool administrator to include only the most useful patents— at a huge cost savings compared to having to license each patent individually from disparate owners. It also reduces the opportunities for any one patent owner to hold out for exorbitant fees, as well as the chances that litigation may result from a stalled negotiation.

For patent owners (i.e., the sellers), meanwhile, the pool also offers benefits. They receive appropriate compensation for their innovations without having to engage in lengthy high-cost negotiations with multiple prospective licensees, at least a few of whom are likely to refuse to negotiate until an even costlier lawsuit is filed that demonstrates the patent owner’s seriousness.

What’s more, manufacturers wishing to license their own patent rights in a patent pool have greatly-reduced licensing and administration costs, and gain greater leverage as part of a pool, especially if they’re a small or mid-sized manufacturer. They also reduce their risk of overreaching when making royalty demands, which in turn reduces the risk of retaliation and blowback from individual licensees.

And finally, the pool also gives members opportunities to collaborate with other licensors in developing enhancements to the technologies in the pool.

By how much, exactly, do patent pools reduce transaction and litigation costs? Until now, hard data was unavailable. But Robert P. Merges, professor of law and co-director of the Berkeley Center for Law and Technology at the University of California at Berkeley, and Michael Mattioli, associate professor of law at Indiana University’s Maurer School of Law, have finally quantified the cost savings of patent pools.

Professors Merges and Mattioli first assessed the costs to the 805 manufacturer licensees of participating in Via’s AAC Audio patent pool. Then they estimated what the costs would have been for the product makers had they had to license those audio rights from each rights holder separately—i.e., identifying the owners of each audio component, contacting and negotiating licenses for each of those components with the various rights holders, and defending against patent infringement suits in the likely event that at least some of those negotiations fail.

The study’s conclusion? By collaborating in Via’s AAC Audio patent pool rather than going it alone, the licensees collectively saved more than $600 million in costs.

“By collaborating in Via’s AAC Audio patent pool rather than going it alone, the licensees collectively saved more than $600 million in costs.

Savings this large help explain why patent pools are growing in popularity (as are similar joint licensing arrangements like the new Avanci platform for standards essential “Internet of Things” patents from Ericsson, Qualcomm, InterDigital, KPN and ZTE).

But as the surprise license deals signed by Chinese product makers Xiaomi and Lenovo in recent weeks for Via’s advanced audio patents show, there’s another key advantage to patent pools besides the large cost savings and litigation avoidance. Via’s AAC audio patent pool was the first company to offer an alternate (i.e., discounted) rate structure to companies operating in China, India, Brazil and other emerging markets. This enables companies selling products at the lower margins and per-unit profits typical in emerging markets to license the audio technology they need in their tablets, laptops and smartphones at more affordable rates.

As patent strategy chief Paul Lin of Xiaomi, the 5th largest smartphone maker in the world, told the intellectual property business journal Intellectual Asset Management: “Xiaomi’s hardware business, like many other Chinese companies, has razor thin margins, which leaves a very small buffer to absorb patent royalty costs.” Via Licensing, he said, had offered a royalty rate that “reflects the reality” of business conditions in China and “met both parties’ needs.”

Perhaps that’s because Via Licensing’s president, Joe Siino, is a veteran dealmaker who understands licensing from both sides of the negotiating table. The former head of IP at Yahoo, Siino has been licensee as well as licensor.

For Siino, the Xiaomi and Lenovo deals were a matter of simple economics. “Patent pool licenses are a very efficient way for companies to reduce IP risk,” he noted. “This is particularly valuable in today’s environment of lawsuits, saber-rattling, and talk of trade sanctions.”

Patent pools may not be appropriate for every technology or industry. But given the ever-larger numbers of patented components in today’s complex products—and the costly and litigious side effects of trying to license each of those components separately—patent pools offer manufacturers a sensible way to help speed new products to market.

" David Kline : ."